Adding new ingredients to the economic blender.
The performance of United States economy in 2023 has been as unexpected as a lentil-avocado-cinnamon smoothie – a tasty surprise. Last week, economic data suggested the Federal Reserve may need to do more to slow the economy. The consumer price index showed inflation edging higher, wholesale inflation was higher than expected (largely due to higher energy prices), and retail sales were healthy.
All the work, work, work.
2023 has been a remarkable year so far. It has, “confounded economists, humbled forecasters, and rewarded investors” reported Nicholas Jasinski of Barron’s. Jasinksi continued “Despite a rapid rise in interest rates, the U.S. economy continues to grow. Inflation has fallen – if not quite to desired levels – and stocks have entered a bull market, with the S&P 500 gaining 17% year to date and the Nasdaq Composite up more than 30%”.
If you’ve ever waited in traffic while the center section of a bridge lifts to allow ships and sailboats to pass underneath, you may have noticed the enormous counterweight that lowers as the bridge moves higher. When the boats have passed, the counterweight rises, and the bridge lowers back into place.
The Chinese government’s zero-COVID policy took the wind from the sails of its economy. When the government finally ended the policy earlier this year, many economists anticipated that pent-up consumer demand would refill China’s economic sails, lifting the global economy, reported Malcolm Scott of Bloomberg. Instead, China’s economy is in an economic doldrum, recovering far more slowly than...
Higher bond yields may be good for income investors – and not so good for stock markets.
After more than a decade of near-zero interest rates, the “free money” era – a time when people and businesses could borrow money and repay it with very low (or no) interest – may be over.
Consumer sentiment is a lagging indicator. It’s also a contrarian indicator.
After rising sharply in June and July, consumer sentiment leveled off this month. The preliminary August reading for the University of Michigan Consumer Sentiment Index was 71.2. That’s slightly below July’s reading, although it’s up 22.3 percent year-over-year, and up 42 percent from its all-time low of 50 (June 2022). The historic average for the Index is 86.
An unwelcome surprise.
Last week, Fitch Ratings startled markets by lowering the credit rating of United States Treasuries from AAA to AA+. It was the second rating agency to downgrade U.S. Treasuries; Standard & Poor’s cut its rating to AA+ in 2011, reported Benjamin Purvis and Simon Kennedy of Bloomberg.
Central bank palooza!
While music lovers attended concerts and festivals across the United States, central banks had a lollapalooza of their own. The U.S. Federal Reserve (Fed) led things off last Wednesday, followed by the European Central Bank (ECB) on Thursday, and the Bank of Japan (BOJ) on Friday. Here’s what happened:
Disinflation was in the air!
To the great relief of the Federal Reserve, the American economy has been experiencing “disinflation,” which is a slowdown in the rate of inflation. For example, last week we learned that...
Markets are playing Federal Reserve (Fed) Clue.
Last week, investors parsed the monthly Employment Situation Summary from the Bureau of Labor Statistics for clues about whether the Fed will raise the federal funds rate at its next meeting or leave the rate unchanged, reported Megan Leonhardt of Barron’s. The Fed has been aggressively raising the rate to slow the pace of inflation. Higher rates typically lead to slower economic growth and fewer jobs, so the employment report offers some signals about the Fed’s progress so far and what may come next.
Showing remarkable resilience.
Throughout the first half of 2023, the U.S. economy and financial markets proved to be resilient – and so did investors. U.S. stock markets moved higher amid enthusiasm for artificial intelligence and expectations that the Federal Reserve’s tightening cycle might be near an end. The Standard & Poor’s 500 Index entered a bull market and the Nasdaq Composite Index delivered its best first-half performance in 40 years, gaining more than 30 percent over the period, reported Barron’s.
The times, they are a changin'.
AI is leading the change charge and it seems investors are taking notice. Late last year, an AI research lab introduced a chatbot that could answer questions – and people were enthralled. Within two months of its introduction, more than 100 million people had engaged with the technology, reported David Curry of Business of Apps. It wasn’t long before AI platforms that could generate images and audio, and help with coding were released.
There is one decision all investors should make: how to allocate the money they’re investing. Asset allocation decisions are usually based on a myriad of factors: expected returns, potential volatility, and appetite for risk, among others.
Leaping over the wall of worry.
The “wall of worry” is an obstacle – or set of obstacles – that investors face. This year, the wall reached a considerable height as inflation, the War in Ukraine, United States-China tensions, slower earnings growth, the high cost of residential real estate, low demand for commercial real estate, tightening credit conditions, and other issues weighed on investor confidence and consumer sentiment.
As Gomer Pyle used to say, “Surprise, surprise, surprise!”
Gomer Pyle USMC was a popular American sitcom in the 1960s. It focused on a naïve, do-gooding auto mechanic from Mayberry RFD who joined the military. Gomer Pyle, the much-loved main character, was known for catchphrases such as shazam, golly, and surprise, surprise, surprise.
It’s a three-ring circus!
For centuries people have embraced the circus. Enjoying the sticky fluff of cotton candy while elephants, clowns and trapeze artists perform in the spotlights. Merriam Webster Dictionary defines the experience as wild, confusing, engrossing and entertaining.
Some aspects of that description apply to recent financial market activity. Last week, we saw...
Investors aren’t happy, but stocks are up.
If you ever participated in a fantasy football league, you may have experienced a run on a position during your draft. One person picks a quarterback or tight end mid-round and, suddenly, almost everyone rushes to follow suit. A similar occurrence may be happening in the United States stock market.
The debt ceiling standoff continues.
Consumers aren’t optimistic. The Consumer Sentiment Index fell to a six-month low in May, dropping 9.1 percent month-to-month. Participants in the University of Michigan survey were...
The labor market just keeps growing…and growing…
Last week, the April employment report for the United States arrived. It showed that unemployment dropped to the lowest level in more than 50 years – 3.4 percent. Other highlights included:
Despite more than a year of aggressive Federal Reserve rate increases, the United States economy is still growing, albeit more slowly. U.S. gross domestic product (GDP) – the value of all goods and services produced in the U.S. economy – grew by 5.1 percent over the first quarter.
Better than expected.
It’s earnings season – the time when publicly traded companies report on how profitable they were during the first quarter of 2023. So far, reports suggest that companies listed on United States stock exchanges did better than many had anticipated. Almost 20 percent of companies in the Standard & Poor’s 500 Index have reported and three-out-of-four have exceeded earnings expectations...
Keep your eye on the big picture.
Last week, there was nothing too surprising in economic and financial news.
Inflation eased, as expected, although it remained above the Federal Reserve (Fed)’s target rate. The Treasury yield curve remained inverted with three-month Treasury bills yielding more than 10-year Treasury notes, as they have been since November 2022. Also, we may be nearing an end to rate hikes around the world. Bloomberg News reported:
Some illustrations are optical illusions. When two people view the picture, they may see completely different images. A good example is Rubin’s Vase. One viewer may see a vase, while another sees two faces.
Current economic conditions can be interpreted in different ways, too. Recent economic data and a possible credit crunch, resulting from upheaval in the banking sector, suggest growth is slowing. After viewing the data, some say we’re heading for a soft landing, and others say a recession is coming.
Perhaps we should call this a pushmi-pullyu market.
The first quarter of 2023 brought Dr. Dolittle’s ficitional pushmi-pullyu – the rarest animal of all – to mind. It is the offspring of goat-antelopes and unicorns, and has a head at each end of its body. The pushmi-pullyu’s unusual anatomy allows it to easily and rapidly change direction, making it difficult to catch.
What’s your jam?
When you think of fun, are you running an Arctic marathon? Biking to your favorite burger place? Gaming with friends online? Each has inherent risk: Polar bears and hypothermia, traffic and flat tires, and viruses and identity theft. Those who enjoy these activities, understand the possible risks and manage them.
Unknowns and uncertainty.
Financial markets were volatile last week as investors parsed the risks around bank closures, central banks offered additional protections for depositors, and regulators took a harder look at bank balance sheets.
Thrown for a loop.
Early last week, Federal Reserve Chair Jerome Powell told Congress the Fed is committed to bringing inflation down to 2 percent. If economic data continues to come in hot, he said, then it’s likely the Fed will raise rates higher than expected and keep them higher for longer.
Stocks and bonds are two of the better-known asset classes in the family of potential investments. Last week, they were in opposition.
Is it good news or bad news?
The answer depends on your perspective. Last week, we learned that...
Brace for a bumpy ride.
There were some unwelcome surprises in last week’s economic data that caused markets to reassess expectations for 2023. For example...
This time may be different...or it may not be.
There has been a lot of speculation about how the Federal Reserve’s policies will affect the United States economy. Economists have differing opinions about whether the country is headed for...
What do Samuel Clemens (a.k.a. Mark Twain) and the current economic expansion have in common?
Author and humorist Twain was prematurely reported to be dead. It first happened in 1897. Twain was on a speaking tour in London when rumors that he had fallen ill and died began to circulate. Then, about a decade later, The New York Times reported that a yacht Twain was on had sunk.
The vicious cycle of inflation.
Last week, we learned that pay increases at central banks in many parts of the world won’t keep pace with inflation. As a result, their employees may not be able to maintain the standards of living they had before inflation began rising. For example, at the United States Federal Reserve (Fed) the maximum pay increase was 5.1 percent for 2022. That’s significantly below inflation which averaged 8 percent last year, reported Jana Randow and Enda Curran of Bloomberg.
“It’s hard to be a contrarian for very long these days because the consensus seems to change so quickly,” opined Ed Yardeni via LinkedIn last week.
We’ve certainly seen a shift in investors’ preferences during the first few weeks of this year. Despite widespread expectations that markets would move lower early in 2023, major U.S. stock indices have trended higher.